Euro Money Market Spreads During the 2007-? Financial Crisis
European Central Bank (ECB)
Università di Milano Bicocca; International Centre for Economic Research (ICER); Center for Economic Research on Pensions and Welfare Policies (CeRP); Fondazione Eni Enrico Mattei (FEEM)
October 1, 2011
Journal of Empirical Finance, 2012, 19, 548-557.
In the paper we investigate the empirical features of euro area money market turbulence during the recent financial crisis. By means of a novel Fractionally Integrated Heteroskedastic Factor Vector Autoregressive model, we find evidence of a deterministic level factor in the EURIBOR-OIS (OIS) spreads term structure, associated with the two waves of stress in the interbank market, following the BNP Paribas (9 August 2007) and Lehman Brothers (16 September 2008) "shocks", and two additional factors, of the long memory type, bearing the interpretation of curvature and slope factors, respectively. The unfolding of the crisis yield a significant increase in their persistence and volatility. We also find evidence of a declining trend in the level and volatility of OIS spreads since December 2008, associated with ECB liquidity policies.
Keywords: money market interest rates, euro area, sub-prime credit crisis, credit risk, liquidity risk, long memory, structural change, fractionally integrated heteroskedastic factor vector autoregressive model
JEL Classification: C32, E43, E50, E58, G15Accepted Paper Series
Date posted: May 12, 2010 ; Last revised: August 29, 2012
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